World Academy of Science, Engineering and Technology
International Journal of Mechanical, Aerospace, Industrial, Mechatronic and Manufacturing Engineering Vol:8, No:1, 2014
Proposal for Cost Calculation of Warehouse
Processes and Its Usage for Setting Standards for
Performance Evaluation
Tomas Cechura, Michal Simon
Abstract—This paper describes a proposal for cost calculation of
warehouse processes and its usage for setting standards for
performance evaluation. One of the most common options of
International Science Index, Industrial and Manufacturing Engineering Vol:8, No:1, 2014 waset.org/Publication/9997341
monitoring process performance is benchmarking. The typical
outcome is whether the monitored object is better or worse than an
average or standard. Traditional approaches, however, cannot find
any specific opportunities to improve performance or eliminate
inefficiencies in processes. Higher process efficiency can be achieved
for example by cost reduction assuming that the same output is
generated. However, costs can be reduced only if we know their
structure and we are able to calculate them accurately. In the
warehouse process area it is rather difficult because in most cases we
have available only aggregated values with low explanatory ability.
The aim of this paper is to create a suitable method for calculating the
storage costs. At the end is shown a practical example of process
calculation.
Keywords—Calculation, Costs, Performance, Process,
Warehouse.
I. INTRODUCTION
A wide range of generally accepted benchmarking metrics
is used for performance measurement. Generally, there
are two different approaches: economic (i.e. revenue related to
cost) and technical (i.e. outputs related to inputs). Pure
economic performance measurement is somewhat difficult
because warehouses typically do not generate revenues.
Technical performance measurement uses a wide range of
logistics metrics which usually compare one input to one
output. An example of a technical metric is the number of
picked lines during a given time period. Generally, it is very
difficult to measure process performance (or employee
performance) if we do not know what to compare. The
framework for performance evaluation should be based on the
ability of processes (or employees) to meet achievable
standards. However, this brings us to a crucial question - what
is an achievable standard and how do we get it? In our
solution we are looking for possible ways to appropriately
establish standards for warehouse process costs. These
standards should be achievable and challenging at the same
time.
Tomas Cechura and Michal Simon are with the Department of Industrial
Engineering and Management, University of West Bohemia, Univerzitní 22,
306 14, Pilsen, Czech Republic (e-mail: tcechura@kpv.zcu.cz,
simon@kpv.zcu.cz).
International Scholarly and Scientific Research & Innovation 8(1) 2014
II. LITERATURE REVIEW
Logistics benchmarking to improve productivity and quality
has been used for more than 20 years by more than half of the
Fortune 1000 companies [1]. Logistics benchmarking
traditionally uses a set of individual factors of productivity
which compare one input to one output. This method is often
referred as the ratio method [2], [3]. However, the use of
various single ratio measures can lead and often leads to
distorted results. The problem that came along with single
ratios is: how to determine if the warehouse performs well
when some metrics are good and others poor [4]? For this
reason models were developed which simultaneously include
more significant factors. A typical representative of these
methods is Data Envelopment Analysis (DEA) [5]. A wide
variety of modifications have been developed over the last few
years based on the DEA framework in order to make the
method more usable for self-reported warehouse data. These
studies have in common that they use a large and diverse
sample of warehouses; see, [6]-[8]. Furthermore they define a
set of warehouse metrics for multi-criteria analysis to
determine the best (the most efficient) warehouses in the
reference sample. [9] Most of these studies consider costs as
one of the factors that enter into the analyzed metrics. None of
them, however, focuses on how these costs can be accurately
calculated. Costs are usually expressed in aggregated form,
thereby explanatory ability is lost [10]-[11]. The goal of this
study is to develop a framework for accurate calculation of the
warehouse costs that enters performance measurement
metrics.
III. METRICS USED TO MEASURE THE PERFORMANCE OF
WAREHOUSE PROCESSES
The choice of methods for measuring performance is a
critical activity for identification of inefficiencies in processes.
A suitable set of metrics can be used as a protection against
loss of quality or loss of customers. Performance indicators in
the warehouse process area can generally be summarized by
one of the following:
• Operating costs, such as warehouse costs as a percentage
of sales.
• Operating productivity, such as pick-lines, orders, cartons,
pallets handled per person per hour.
• Response time, such as order-cycle time (minutes per
order).
• Order accuracy, such as fraction of shipments with
returns.
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 World Academy of Science, Engineering and Technology
International Journal of Mechanical, Aerospace, Industrial, Mechatronic and Manufacturing Engineering Vol:8, No:1, 2014

Because our solution focuses on operating costs we are

looking for Key Performance Indicator (KPI) in this area. The

Surcharge
Indirect performance area

area
main purpose of monitoring these KPIs is to find opportunities
for improving the whole warehouse process. Typical
warehouse performance indicators are listed in Table I.

Overhead costs

Process
TABLE I

area
TYPICAL WAREHOUSE PERFORMANCE INDICATORS

Cost object
Measure Type Calculation Typical value
Cost as % of Total Warehouse Cost
min 3.82

performance
Sales Overall Sales
Total Warehouse Cost

Direct

area
Cost per Order min 5.23
Total Orders Shipped
Items Picked (Packed) 120 picked
Items per Hour max
Total Warehouse Labour Hrs items / hour
Orders Picked (Packed)
Order per Hour max 5 orders / hour

Direct costs
Total Warehouse Labour Hrs
International Science Index, Industrial and Manufacturing Engineering Vol:8, No:1, 2014 waset.org/Publication/9997341

Table I shows that Cost per Order is calculated from the

total warehouse cost. Other metrics are also calculated from
total (aggregated) values. If we look at how the warehouse
costs are usually monitored in companies we find that they are
either not monitored at all or are expressed by one total value,
see for example Supply Chain Digest survey [11]. This means
that most companies cannot know the structure of warehouse
costs or manage them effectively. In other words this means
that metrics based on total cost values do not allow us to find
opportunities for cost reduction.
IV. PROPOSAL FOR COST CALCULATION OF WAREHOUSE
PROCESSES
Usually monitored metrics which include warehouse costs
are as follows:
• Cost of receiving per receiving line.
• Cost per put-away line.
• Warehouse cost per item.
• Cost of picking per order line.
• Cost of shipping per order.
• Cost per Order.
• etc.
The exact calculation of the costs listed above by
conventional surcharge methods is nearly impossible. It is
necessary to use one of the process-oriented methods. In our
solution we chose a methodology called
Prozesskostenrechnung (PKR) which was developed by
Horváth and Mayer in 1989 [12]. PKR methodology (such as
Activity Based Costing) is based on allocating costs to
activities which are consumed by various products in the
production process [13]. The PKR methodology assigns costs
to products based on how much of the costs are actually
caused by activities associated with these products. The
principle of cost allocation is shown in Fig 1.
Fig. 1 Principle of costs allocation according the assignment to the
cost object - edited according to [12]
Since there are no material transformations performed in the
warehouse (and hence there is no direct creation of added
value for the customer) warehouse costs belong to overhead
costs in the indirect performance area. For each individual
warehouse process it is necessary to determine the appropriate
method of cost allocation. Basically there are two possible
options: process method or surcharge method. In the process
method we handle those processes that are stable, standardized
and repetitive. All other processes that do not meet these
conditions are handled using the surcharge method.
The procedure of process cost allocation is as follows. First,
based on the analysis of activities, sub-processes are
established in existing costs pools (e.g. purchase department).
Cost drivers and process quantities for individual sub-
processes are simultaneously defined. The data are obtained
from the statistical analysis of repetitive warehouse processes.
The next step is summarization of several related sub-
processes which exceed cost pools into a few main processes.
Determination of sub-process cost and cost rates is as
follows:
1) Selection of allocation basis.
2) Total cost of cost pool is divided into so-called lmi-
processes (they are quantity variable and depend on
process quantities) and lmn-processes (they are quantity
independent). Allocation basis is used as a scale for
distribution.
3) Lmi and lmn sub-processes are displayed in the cost pool
table.
4) Lmi sub-processes costs are calculated. The total cost of
the cost pool is divided between individual sub-processes.
Allocation basis is used as a scale.
5) Establishing surcharge. In this step lmn sub-processes
costs are assigned to the lmi sub-processes cost.
6) Sub-processes cost rates are established for lmi+lmn sub-
processes as a proportion of the cost of sub-processes and
corresponding process quantity.

International Scholarly and Scientific Research & Innovation 8(1) 2014 116 scholar.waset.org/1999.8/9997341
 World Academy of Science, Engineering and Technology
International Journal of Mechanical, Aerospace, Industrial, Mechatronic and Manufacturing Engineering Vol:8, No:1, 2014

V. VERIFICATION OF THE PROPOSED SOLUTION FOR COST P

SP lmi cost rate (2)
CALCULATION OF WAREHOUSE PROCESSES P
picking lmi cost rate 0.27 EUR
The proposed procedure has been numerically verified.
Tables II and III show an example of calculation of cost rates
for several warehouse sub-processes. 5) Calculation of lmn surcharge:

TABLE II SP lmn surcharge ∑ P

lmi cost of SP (3)
EXAMPLE OF CALCULATING OF WAREHOUSE SUB-PROCESSES COST RATES –
RIGHT PART picking lmn surcharge 4 000 166.7 EUR
Quantity Nr. of
Number Sub-process Cost drivers of sub- employe
process es 6) Calculation of sum lmi+lmn sub-process cost:
nr. of received
1 receiving lmi 1800 0.5
pallets SP lmi lmn cost SP lmi cost SP lmn surcharge (4)
nr. of put-awayed
2 put-away lmi
pallets
2000 0.3 picking cost 4 000 166.7 4 166.7 EUR
nr. of picked
International Science Index, Industrial and Manufacturing Engineering Vol:8, No:1, 2014 waset.org/Publication/9997341

3 picking lmi 15000 2.0

items 7) Calculation of lmi+lmn sub-process cost rate:
nr. of packed
4 packing lmi 1500 2.0
items P
5 … … … … SP lmi lmn cost rate (5)
P
Sum 4.8 .
6 control lmn - 0.2 picking cost rate 0.28 EUR
Sum
5.0
(lmi+lmn) The result is that cost of one picking process is 0.28 EUR.
Rates for other sub-processes can be calculated analogically.
TABLE III
EXAMPLE OF CALCULATING OF WAREHOUSE SUB-PROCESSES COST RATES –
LEFT PART VI. CONCLUSION
Sub-process costs (EUR) Sub-process cost rates (EUR) The use of process-oriented calculation methods (such as
lmi
Surcharge Sum
lmi lmi + lmn PKR) allows us to determine the cost rate for individual
lmn lmi + lmn
1000.0 41.7 1041.7 0.56 0.58
warehouse processes with high accuracy. Furthermore, on the
600.0 25.0 625.0 0.30 0.31 basis of cost rates we can set standards for monitoring and
4000.0 166.7 4166.7 0.27 0.28 measuring the performance of these processes. In comparison
4000.0 166.7 4166.7 2.67 2.78 to traditional methods metrics which include costs are not
… … … … … calculated from total (aggregated) values. In our solution, the
9600.0 400.0 10000.0 costs are calculated using the process method which also
400.0 allows us to identify opportunities for future improvements.
10000.0 For example, we can compare the calculated cost of a single
picking line with the cost obtained from the total value. And if
The calculation procedure described in the previous section there is a significant difference we can start looking for
is shown at first in general and then numerically for the sub- reasons why this is so. This means that a process-oriented
process called picking. The acronym “SP” in the following calculation allows achievable standards to be set for
formulas means “sub-process”. The individual steps of performance measurement of those metrics which include
calculation are as follows: cost. Additional benefits of the process solution include an
1) Personal capacity is selected as allocation basis. Picking analysis of processes, identification of bottlenecks or
process depends on process quantity; therefore it is an identification of non-value added processes. Implementation
“lmi process”. of process-oriented calculation leads to increasing
2) For example we know (from statistical data) that picking transparency of overheads. Traditional calculation uses
process quantity was 15,000 in the previous time period. surcharge which assigns some percentage of costs to products.
The total warehouse cost was 10,000 EUR in the same This percentage may not match the actual consumption.
period. Process-oriented calculation (and thus the PKR methodology)
3) Calculation of lmi sub-process cost: allows allocation of overhead costs according to actual
consumption of resources. This effect is especially significant
SP lmi cost nr. of employees of SP (1) for warehouse processes. In the traditional approach
.
10 000 warehouse process costs belong to manufacturing overheads.
picking lmi cost 2 4 000 EUR Thus it is impossible to determine how much of the costs they
5
actually caused. On the other hand process-oriented
4) Calculation of lmi sub-process cost rate: calculation has one huge disadvantage which lies in its
demand for extremely detailed input data. Gathering the
necessary data is usually very difficult and time consuming.

International Scholarly and Scientific Research & Innovation 8(1) 2014 117 scholar.waset.org/1999.8/9997341
 World Academy of Science, Engineering and Technology
International Journal of Mechanical, Aerospace, Industrial, Mechatronic and Manufacturing Engineering Vol:8, No:1, 2014

ACKNOWLEDGMENT
The authors are thankful to the Operational Programme
Education for Competitiveness co-funded by the European
Social Fund (ESF) and national budget of the Czech Republic
for the grant No. CZ.1.07/2.3.00/20.0147 - “Human Resources
Development in the field of Measurement and Management of
Companies, Clusters and Regions Performance”, which
provided financial support for this research.

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